April 4, 2009

Mortgage defaults

Two pieces of recent mortgage-default news I thought you might want to know about:

First, the travails of FHA, the go-to place for borrowers with small down payments. The Federal Housing Administration insures FHA mortgages, which means it's on the hook if those loans go bad. Now its market share has shot up to about 30 percent -- thanks in large part to the death of subprime and no-money-down options -- and it's being swamped with problem loans. Some borrowers are missing payments immediately.

As The Wall Street Journal reports, this has raised the specter of another taxpayer bailout -- or changes for future borrowers:

If defaults drain the FHA's insurance fund, the Obama administration will have to decide whether to ask Congress for taxpayer money or raise the premiums it charges to borrowers. That decision will be spelled out in President Barack Obama's 2010 budget, Housing and Urban Development Secretary Shaun Donovan told lawmakers.

The other news: a glimpse into what works when lenders modify mortgages to try to keep borrowers from ending up in foreclosure.

The Office of the Comptroller of the Currency and the Office of Thrift Supervision, which track two-thirds of U.S. mortgages in quarterly reports, said "re-default rates" on modified loans last year "were consistently lower for modifications that resulted in lower monthly payments."

When modifications decreased monthly payments by more than 10 percent, only about 23 percent of the loans became seriously delinquent six months later. By contrast, some 51 percent of the loans in which payments remained unchanged were seriously delinquent after six months. The comparable number for loan modifications in which payments increased was 46 percent.

In more than half of loan modifications last year, lenders kept payments the same or increased them, the agencies said. But more loan mods came with decreased payments by the end of 2008.

Comments

I would be surprised if the minimum down payment doesn't start rising for FHA soon. I was all set up with a lender for a loan and just recently learned they've stopped 5% down in this area and will likely stop 10% down in a matter of months. That was a bit of a surprise to me. Lending standards definitely need to be tightened.

If lenders required 20% down for home purchases - home prices will come crashing down. NO WAY that will happen! NO WAY! Normal (meaning 99% of - especially if you consider the real value of people's homes) MD residents don't have 2% down - let alone 20%. That would be very, very, very bad! Just ask any realtor or mortgage broker!

Disagree - this would be a very very good thing for America and finacially responsible citizens to see the return of 20% down. Repeat this phease over is over : "Credit is debt!"...and the last thing we need is more debt

I don't think blanketing everyone with the requirement of 20% down is a good idea. I think that the lower down payment options should remain available, but the standards for lending to people should be tightened. I don't like it when there's a blanket elimination of an option since individuals have different credit histories, employment histories, assets, and values. Not everyone wants to buy a house for little to no money down, flip it, and then move on to the next.

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About Jamie Smith Hopkins

Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
• Baltimore Sun articles by Jamie